Islamic Mortgages

Islamic Mortgages

The far right and the far left are equal in their attempts to inflame this Islamo-Christian divide, with the result that the ill-informed jump on a dangerous bandwagon.

My Facebook page is the recipient of dozens of admonitions and representations that someone or another is doing something bad to someone else. Often ill-informed or downright kooky, there is no effective mechanism to knock out these damaging pronouncements, and simply commenting is, excuse the French, pissing into the wind.

Take the issue of Sharia Law for example. Now I am no expert in the field, but first of all, it strikes me that the general take-home message behind Sharia Law is not that much different to that of the Old Testament. The idea of “an eye for an eye” is found at Exodus 21.24. In management, I am a big fan of it, just this week threatening a self-assured young employee that I’d “cut his balls off” if he stuffed up a second time on account of not listening to important instructions. Not surprisingly his commitment to the task has grown exponentially, even with the availability of Western Anesthetic.

More seriously, Facebook posts are now focusing on Sharia Lending. Apparently the Koran states,

“Those who charge riba are in the same position as those controlled by the devil’s influence… As for those who persist in riba, they incur Hell, wherein they abide forever” – Qur’an 2:275

Riba translates as usury, which is the action or practice of lending money at unreasonably high rates of interest. Riba is therefore not interest, but the pricing and charging interest in a (supposedly) unfair or extortionate manner. The pricing of interest in western markets is well institutionalised, and takes into account inflation and risk. In a well-informed, competitive and well regulated market, it is near impossible to charge extortionate prices. That is why in the west, we place so much importance on competition policy and consumer protection.

The translative subtlety between riba and interest has opened a loop-hole for Islamist scholars, many of whom have opted for a direct interpretation. They say any interest is against Sharia law, because (they claim) it is a form of “effortless profit”, or extra earning that is “not the result of exchange”. Such an interpretation is a careless application of the truth. Whether as an individual or an intermediary, it is not effortless to accumulate money which can be lent out in the future.

And isn’t taking on the risk that someone might not repay you a form of exchange. Interestingly, just last week I set up a loan where the terms included paying it back within a year, with 30 percent interest. “Oh, no, the evil of it” I hear you all say. But what if I told you all the banks had said no, creditors were at the door and it was the only way to save a business, 5 jobs and the owners’ retirement savings. Isn’t the business owner getting something pretty tangible in exchange for someone taking on this risk, pretty much no questions asked?

Semantics aside, it is possible, even easy, to borrow under Sharia law. The loans are structured so that the “lender” actually buys the asset and arranges for the borrower to buy it piecemeal. So a Muslim schoolteacher might buy a house worth $500,000 on the market by making just 30 easy annual payments of $36,324. Sound familiar – too right it does – it’s what we call in the West an operating lease. In an operating lease, the asset is owned by the lessee until all the payments are made. Those of you that are familiar with financial math will immediately grasp the fact that given the annual payments and the value of the house, you can easily derive an underlying interest rate – in this case, 6 percent. Muslims know this – they and their near neighbours invented algebra.

Given all this, why focus on Sharia loans as “evidence” that Muslim people are not compatible with The West. Unequivocally religiously motivated suicide bombing and religious murder is incompatible with Western doctrines, but if someone likes operating leases over traditional housing loans, what’s the big deal? In fact, perhaps The West should explore expanding the application of operating leases, to farmers and graziers in particular.

Not only that, the Christian Bible also contains many admonitions regarding the charging of interest, Leviticus 25:35-37, Deuteronomy, Exodus 22:25, Luke 6:34-35, Psalm 15:5 Romans 13:8, Matthew 25:27, Ezekiel 22:12, and Proverbs are some. To me, the most interesting of these is Psalm 15:5:

“Who does not put out his money at interest and does not take a bribe against the innocent? He who does these things shall never be moved”

Islam or Old Testament, it seems that the idea that charging interest on borrows is in some way generally undesirable. This is something I have thought a lot about in my financial career, and the conclusion I have come to is that borrowing limits the ability of an individual to be themselves and to achieve fulfilment (personally or in God, however you wish to view it). Think of all those people trapped in jobs they hate, simply to pay the mortgage, or of women in unhappy marriages, because (perhaps amongst other things) the mortgage prevents them from setting their own destiny.

Perhaps the last work belongs to William Shakespeare, who through the eyes of Lord Polonius observed: